What's wrong with the government "investing" in business?

During the election debates, President Obama claimed that the government should be "investing" in science, education, alternative energy, and other worthy businesses. What is the ideal at work in such claims? What's right or wrong about it? What does such "investment" mean in practice?

Anonymous , 13.11.2012, 22:14

Idea status:
under consideration

Comments

Robert Nelson, 01.12.2012, 08:01

I think that this question is addressed very well by a short essay written by Milton Friedman. It was titled: "Why Government Is the Problem." I urge that short booklet be read by everyone.

The point made in Friedman’s booklet is that government, unlike business, can invest in failed enterprises without limit and often do to avoid damage to the political position of those who created them. This presents a “moral hazard” that promotes bad choices indemnified by the government.

Due to political conflict of interest, the government actually is at a knowledge disadvantage to understand whether or not an idea is good or bad, but have the means to pursue it. Industrial brain trusts generally have insights that are absent from government so they are better suited and equipped to justify a propensity to invest. Private business must exit operations when they appear to be near failure because they don't have an infinite bank account, and know that their financial survival depends on prudent business judgment. By timely exit, private resources are preserved to start again with a new concept or business model that can be successful.

Some economists estimate that 8 of 10 new starts fail, but that is not to say that the same number of entrepreneurs fail because they live to fight another day. They generally become highly successful and productive. This is possible as long as the government does not interfere, thereby corrupting the competitive marketplace. (See Ford, GM, Chrysler business performance, Solyndra and Obama's green companies notwithstanding.)